ANNALY CAPITAL MANAGEMENT INC 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 Annaly Capital Management, Inc. 100 132 122 131 134 138 S&P 500 Index 100 122 116 153 181 233 BBG REIT Index 100 120 117 144 112 132 The information in the share performance graph and table has been obtained from sources believed to be reliable, but neither the accuracy nor completeness can be guaranteed. The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance. The above performance graph and related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act or to the liabilities of Section 18 of the Securities Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act, except to the extent that we specifically incorporate it by reference into such a filing. Share Repurchase In January 2022, we announced that our Board authorized the repurchase of up to $1.5 billion of our outstanding common shares through December 31, 2024. The new share repurchase program replaces our previous $1.5 billion share repurchase program, which expired on December 31, 2021. No shares were repurchased with respect to this share repurchase program during the year ended December 31, 2021. As of December 31, 2021, the maximum dollar value of shares that may yet be purchased under this plan was $1.5 billion. Total Number of Shares Purchased (1) Average Price Paid Per Share (2) The Total Number of Shares Purchased as Part of a Publicly Announced Repurchase Program Maximum Dollar Value of Shares That May Yet Be Purchased Under The Plan (2) (dollars in thousands) December 1, 2021 - December 31, 2021 6,698 $ 8.46 — $ 1,500,000 Total 6,698 — $ 1,500,000 (1) Represents shares acquired in satisfaction of the tax withholding obligations on stock-based awards granted under our equity incentive plans during the three months ended December 31, 2021. (2) Excludes commission costs. 47 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 6. Selected Financial Data ITEM 6. [Reserved] 48 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain statements contained in this annual report, and certain statements contained in our future filings with the the Securities and Exchange Commission (the “SEC” or the “Commission”), in our press releases or in our other public or stockholder communications contain or incorporate by reference certain forward-looking statements which are based on various assumptions (some of which are beyond our control) and may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, risks and uncertainties related to the COVID-19 pandemic, including as related to adverse economic conditions on real estate-related assets and financing conditions (and our outlook for our business in light of these conditions, which is uncertain); changes in interest rates; changes in the yield curve; changes in prepayment rates; the availability of mortgage-backed securities and other securities for purchase; the availability of financing and, if available, the terms of any financing; changes in the market value of our assets; changes in business conditions and the general economy; operational risks or risk management failures by us or critical third parties, including cybersecurity incidents; our ability to grow our residential credit business; our ability grow our middle market lending business; credit risks related to our investments in credit risk transfer securities, residential mortgage-backed securities and related residential mortgage credit assets, and corporate debt; risks related to investments in mortgage-servicing rights (“MSR”); our ability to consummate any contemplated investment opportunities; changes in government regulations or policy affecting our business; our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and our ability to maintain our exemption from registration under the Investment Company Act. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in this annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q or current reports on Form 8-K. We do not undertake, and specifically disclaim any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. All references to “Annaly,” “we,” “us,” or “our” mean Annaly Capital Management, Inc. and all entities owned by us, except where it is made clear that the term means only the parent company. Refer to the section titled “Glossary of Terms” located at the end of this Item 7 for definitions of commonly used terms in this annual report on Form 10-K. This section of our Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2020. 49 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis INDEX TO ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page Overview 51 Recent Developments 51 Business Environment and COVID-19 51 Economic Environment 52 London Interbank Offered Rate (“LIBOR”) Transition Working Group 59 Results of Operations 54 Net Income (Loss) Summary 55 Non-GAAP Financial Measures 55 Earnings available for distribution, earnings available for distribution attributable to common stockholders, earnings available for distribution per average common share and annualized EAD return on average equity 56 Premium Amortization Expense 58 Economic leverage and economic capital ratios 58 Interest Income (excluding PAA), economic interest expense and economic net interest income (excluding PAA) 60 Experienced and Projected Long-term CPR 60 Average Yield on Interest Earning Assets (excluding PAA), Net Interest Spread (excluding PAA), Net Interest Margin (excluding PAA) and Average Economic Cost of Interest Bearing Liabilities 61 Economic Interest Expense and Average Economic Cost of Interest Bearing Liabilities 62 Realized and Unrealized Gains (Losses) 62 Other Income (Loss) 63 General and Administrative Expenses 64 Return on Average Equity 64 Unrealized Gains and Losses - Available-for-Sale Investments 64 Financial Condition 66 Residential Securities 66 Contractual Obligations 69 Off-Balance Sheet Arrangements 69 Capital Management 69 Stockholders’ Equity 70 Capital Stock 70 Leverage and Capital 71 Risk Management 71 Risk Appetite 71 Governance 72 Description of Risks 73 Capital, Liquidity and Funding Risk Management 74 Funding 74 Excess Liquidity 75 Maturity Profile 76 Stress Testing 78 Liquidity Management Policies 78 Investment/Market Risk Management 79 Credit Risk Management 79 Counterparty Risk Management 80 Operational Risk Management 81 Compliance, Regulatory and Legal Risk Management 81 Critical Accounting Estimates 82 Valuation of Financial Instruments 82 Residential Securities 82 Residential Mortgage Loans 83 MSR 83 Interest Rate Swaps 83 Revenue Recognition 83 Consolidation of Variable Interest Entities 84 Use of Estimates 84 Glossary of Terms 85 50 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Overview We are a leading diversified capital manager with investment strategies across mortgage finance and corporate middle market lending. Our principal business objective is to generate net income for distribution to our stockholders and optimize our returns through prudent management of our diversified investment strategies. We are an internally-managed Maryland corporation founded in 1997 that has elected to be taxed as a REIT. Our common stock is listed on the New York Stock Exchange under the symbol “NLY.” We use our capital coupled with borrowed funds to invest primarily in real estate related investments, earning the spread between the yield on our assets and the cost of our borrowings and hedging activities. For a full discussion of our business, refer to the section titled “Business Overview” of Part I, Item 1. “Business.” Recent Developments Sale of Commercial Real Estate Business On March 25, 2021, we announced that we entered into a definitive agreement to sell our Commercial Real Estate (“CRE”) business to Slate Asset Management L.P. and Slate Grocery REIT (together, “Slate”). The transaction represents the sale of substantially all of the assets that comprise our CRE business, which include equity interests, loan assets and associated liabilities and commercial mortgage-backed securities (other than commercial CRTs). Certain employees who primarily supported the CRE business joined Slate in connection with the sale. During the year ended December 31, 2021, the majority of assets held for sale and the associated liabilities were transferred to Slate with the remaining assets expected to be transferred by the end of the first quarter of 2022, subject to regulatory approvals. Revenues and expenses associated with the CRE business will be reflected in our results of operations and key financial metrics through closing. Refer to the “Sale of Commercial Real Estate Business” in the Notes to the Consolidated Financial Statements included in Item 15. “Exhibits, Financial Statement Schedules for additional information related to the transaction. . Business Environment and COVID-19 Financial markets have seen challenging conditions in recent months as the robust performance of the U.S. economy has made it evident that a withdrawal of pandemic era stimulus is imminent. Strong consumption and investment activity helped the U.S. economy record the best annual growth in nearly forty years in 2021. Meanwhile, the labor market has seen a rapid recovery as employers added 6.7 million jobs last year and the unemployment rate fell to 3.9 percent in December 2021. Stimulus measures have helped this rapid recovery, which has also spurred inflation to generational highs, as seen in December when the consumer price index reached 7.0% year-over-year. Although much of this increase in prices was initially considered temporary, ongoing elevated price gains across various categories of goods and services raise the risk inflation could persist for some time. Accordingly, current macroeconomic conditions have led to a meaningful shift by the Federal Reserve (“Fed"), which now views less accommodative monetary policy as the primary way to ensure both parts of its mandate – full employment and stable prices – are being met. In November, the Fed announced a reduction of its asset purchases, which up to that point had been running at a monthly pace of $120 billion per month across U.S. Treasuries and Agency MBS. At the December Federal Open Market Committee (“FOMC”) meeting, the Fed accelerated the slowdown in its asset purchases, in turn signaling a complete stop in March 2022. In addition, the Fed has signaled increases in the Federal Funds Target Rate (“Fed Funds Rate”) beginning in 2022 and an earlier introduction of balance sheet runoff to stem inflationary pressures. Interest rate markets now expect at least five 25 basis point rate hikes in 2022 and balance sheet runoff to begin in the summer months at a pace faster than the 2017 balance sheet runoff of $50 billion per month. This notable shift in expectations has led to a tightening of financial conditions and an underperformance of assets most closely tied to monetary policy, best seen in the spread widening in Agency MBS in recent weeks. In this environment, Annaly generated a negative tangible economic return of 2.4% during the fourth quarter and 0.0% for the full year 2021. Agency MBS spreads widened in light of an increasingly negative supply and demand picture, with the Fed turning from the largest net buyer of Treasuries and agency MBS to a potential seller in the near future. In anticipation of wider spreads, we managed the portfolio to decrease leverage and optimize our asset allocation, with total assets decreasing by approximately $12.4 billion to $89.2 billion during 2021. In conjunction, economic leverage declined from 6.2x to 5.7x, marking the lowest leverage level since 2015. The defensive leverage profile is further supported by low capital structure leverage and minimal asset-level structural leverage, as highly liquid Agency-MBS makes up the majority of Annaly’s portfolio. Moreover, the firm has substantial liquidity with $9.3 billion of unencumbered assets, up $600 million year-over-year. Finally, Annaly remains conservatively hedged to mitigate interest rate risk - with a year-end hedge ratio of 95% and expect to remain close to fully hedged for at least the near term. The portfolio continued to perform strongly, generating GAAP net income of $1.60 for the year and earnings available for distribution of $1.16 which exceeded our aggregate dividend of $0.88 per share. 51 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Allocation to Annaly’s credit businesses increased by approximately 10 percentage points to 32% in 2021 as prospective returns and the strong U.S. economy continued to favor credit. This was a transformative year for Annaly marked by the sale of our Commercial Real Estate business, the launch of our Mortgage Servicing Rights platform and the expansion of our residential credit business. The collective impact of these initiatives has increased our presence throughout the residential housing finance market, enhancing our ability us to allocate capital effectively wherever returns are most attractive. Our MSR business had a strong year with assets increasing over $500 million throughout 2021 to $645 million. We successfully established our MSR platform last year through the addition of key hires, procurement of strategic partnerships and buildout of the operations and infrastructure necessary to scale the business efficiently. As a result of these efforts, we have ended the year as the fifth largest bulk buyer of MSR. Meanwhile, we continue to see significant growth from our Residential Credit group, which grew assets by nearly 90% last year. This growth was enhanced by the launch of our residential whole loan correspondent channel, which expanded our whole loan sourcing capabilities through the addition of new strategic partners and product offerings. Altogether, these efforts helped drive the group’s record $4.5 billion in whole loan originations last year. Annaly’s subsidiary Onslow Bay remains a programmatic issuer of securitizations - pricing 13 whole loan securitizations totaling $5.3 billion since the beginning of last year and was the fourth largest non-bank issuer of prime jumbo and expanded prime MBS over the last two years. With housing fundamentals expected to stay strong, residential credit should remain a key driver of our overall portfolio growth in the year ahead. Lastly, our middle market lending platform continues to demonstrate its differentiated strategy with over $1.5 billion in originations throughout 2021 and a strong credit profile with no loans on non-accrual. The close of Annaly’s inaugural private middle-market lending focused closed-end fund allowed for increased capital allocation flexibility to further scale the business and provides recurring fee revenue to the REIT. Notably, fund proceeds have already been deployed at approximately $450 million of assets. Earnings available for distribution is a non-GAAP financial measure. Refer to the “Non-GAAP Financial Measures” section for additional information, including reconciliations to its most directly comparable GAAP results. Business Continuity Our well-established Business Continuity Planning (“BCP”) was designed to ensure continued, effective operations through a variety of scenarios including natural disasters and disease pandemics. It identifies critical systems, processes, roles and third parties, and can be adjusted on a real-time basis to address situations as they arise. The BCP is regularly updated and tested. Annual testing includes extensive, remote Disaster Recovery testing and tabletop exercise scenarios with management. Key tenets of the planning include active communication between our Crisis Response Team, which is comprised of senior leaders across a number of functions, and our internal and external stakeholders to afford efficient, thoughtful, effective responses to evolving emergency situations. Historical tabletop exercises have included use of CDC Influenza Pandemic exercise materials. That exercise documented our response and possible impacts to a variety of scenarios, including those in which “shelter in place orders” were required and response/ impact assessments to those scenarios. Regular meetings were commenced to implement and review active internal and external communications planning. These exercises, along with regulatory and industry guidance, informed our staged response to the conditions created by COVID-19. In response to COVID-19, our employees largely worked remotely in the first half of 2021 and transitioned to a hybrid model in the second half of 2021 with employees returning to the office on a periodic basis following federal, state and local guidance. At the present, we expect employees to return to the office more regularly starting in the first quarter of 2022 subject to guidance from federal, state and local authorities. For additional information about our response to COVID-19, refer to the section titled “Human Capital” of Part I, Item 1. “Business.” Economic Environment The COVID-19 pandemic continued to provide meaningful challenges to the global economy in 2021. However, U.S. economic growth rebounded sharply as the development and deployment of vaccines and better COVID-19 treatment methods reduced the impact of the virus on economic activity. Combined with the provision of significant fiscal stimulus and easy monetary policy, consumption and investment activity rebounded sharply from their depressed levels immediately following the onset of the pandemic. After registering year-over-year real growth in U.S. gross domestic product (“GDP”) of 5.7% for 2021, marking the highest real output growth since 1984, real output levels now exceed aggregate output at the end of 2019 by 3.1%. Of note, a large share of the growth has been driven by real goods consumption, which has risen 12.1% year-over-year in 2021 as consumers opted to spend increased amounts on cars, furniture, recreational goods and similar items. Services consumption, meanwhile, has seen improvements at a slower rate as COVID-19 restrictions have continued to limit travel and entertainment. 52 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis Private investment activity, meanwhile, rose 7.7% year-over-year on improved activity in structures, equipment, and residential sectors. In line with economic activity, the labor market has seen a meaningful improvement over the course of 2021, with employers hiring an aggregate 6.7 million workers, leading the unemployment rate to decline 2.8 percentage points. This marks one of the largest improvements in the labor market in at least 50 years. At the current level of 3.9 percent, the unemployment rate is below the Federal Reserve’s estimate of the non-accelerating inflation rate of unemployment (“NAIRU”) according to the latest Summary of Economic Projections published following the Federal Open Market Committee meeting held in December 2021. This suggests that meaningful further employment gains are likely only possible at higher rates of wage compensation, although wage gains have been robust in 2021 already. The closely tracked Employment Cost Index rose 4.0% year-over-year in the fourth quarter, up from 2.5% year-over-year in the fourth quarter of 2020. This marks one of the fastest accelerations in wage growth in recent years as workers demanded higher wages, particularly in the highly sought after, lower paid service sector. More broadly, the economy saw a record number of job openings in 2021 as demand for workers soared in the reopening economy. Unfortunately for many businesses, many workers have not reengaged in the labor market during the pandemic as the labor force participation rate – the share of people either working or actively looking for a job as share of the population – remains meaningfully below rates seen ahead of the pandemic. Although adverse demographic trends, such as an aging society, have put downward pressure on the labor force participation rate over a long period of time, the pandemic has accelerated this trend. Inflation has been a major surprise in 2021. Although year-over-year changes in the Personal Consumption Expenditure Chain Price Index (“PCE”) measured 1.3% in December 2020, well below the Fed’s 2% target, headline PCE rose to 5.8% year-over-year in December 2021. The meaningful acceleration in inflation has been driven by higher inflation in consumer goods. For example, goods excluding foods and energy have contributed 18 basis points to the monthly changes in the consumer price index during 2021, meaningfully higher than the 0.2 basis points contribution to monthly changes in the period between 2016 and 2020. The sharp rise in goods prices has been driven by households, who are beneficiaries of healthy balance sheets and sharply rising asset and house prices. This has in turn led to strong demand for cars, furniture, recreational goods and similar items. Services inflation, meanwhile, has been more muted, though sectors that saw strong demand as the pandemic receded, such as travel, and shelter inflation have been increasing. The Fed conducts monetary policy with a dual mandate: full employment and price stability. As the pandemic continued to impact the U.S. economy in meaningful ways, the Fed continued its easy monetary policy for much of the year in a successful attempt to reinvigorate the labor market following the sharp rise in unemployment in 2020. The target range for the Federal Funds rate was kept at 0.0% - 0.25% for all of 2021, while simultaneously purchasing assets at a pace of $80 billion per month in Treasury securities and $40 billion per month in agency MBS between January and October 2021. The Fed announced a slowdown in the pace of its asset purchases at the November Federal Open Market Committee meeting, effectively signaling a gradual end to the asset purchases. During the year ended December 31, 2021, yields on the 10-year U.S. Treasury note rose by 60 bps primarily in the first half of the year as better economic prospects lead investors to reassess the level of interest rates. Given high levels of inflation, the vast majority of the repricing has been driving by inflation compensation, as investors require higher compensation in times when rising inflation erodes their bond market returns. Meanwhile, the mortgage basis, or the spread between the 30-year Agency MBS coupon and 10-year U.S. Treasury rate, widened gradually over the course of the year, ending the year 13 bps wider than at the end of 2020. The following table below presents interest rates and spreads at each date presented: As of December 31, 2021 2020 2019 30-Year mortgage current coupon 2.07% 1.34% 2.71% Mortgage basis 56 bps 43 bps 79 bps 10-Year U.S. Treasury rate 1.51% 0.91% 1.92% LIBOR 1-Month 0.10% 0.14% 1.76% 6-Month 0.34% 0.26% 1.91% 53 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Item 7. Management’s Discussion and Analysis London Interbank Offered Rate (“LIBOR”) Transition Working Group The United Kingdom Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincided with the announcement of LIBOR's administrator, the ICE Benchmark Administration Limited (“IBA”), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. We have established a cross-functional LIBOR transition committee to determine our transition plan and facilitate an orderly transition to alternative reference rates. Our plan includes steps to evaluate exposure; review contracts; assess impact to our business; process and technology and define a communication strategy with shareholders; regulators and other stakeholders. The committee also continues to engage with industry working groups and other market participants regarding the transition. We continue to remain on track with our LIBOR transition plan, which requires different solutions depending on the underlying asset or liability. Similar to the rest of the market, the bulk of our exposure is in derivatives contracts. Certain contracts, such as interest rate swaps, have an orderly market transition already in process, whereas other contracts, such as loan agreements, require bilateral amendments and adequate time left to resolve. The State of New York approved legislative solutions for contracts such as residential whole loans that are governed by New York state law, although more legislative work is needed at the federal level. We are supportive of the potential legislative solutions at the state and federal level. We are considering all available options with respect to our preferred stock, which include liability management actions such as tenders, calls, exchange offers, language amendments, changing the calculation agent, and/or allowing fallbacks to trigger. As of December 31, 2021, we had $1.5 billion of USD LIBOR-linked preferred stock that may remain outstanding beyond the June 30, 2023 cessation date. See the risk factor titled “The discontinuation of LIBOR may affect our results” in Part I, Item 1A “Risk Factors” for additional information. Results of Operations The results of our operations are affected by various factors, many of which are beyond our control. Certain of such risks and uncertainties are described herein (see “Special Note Regarding Forward-Looking Statements” above) and in Part I, Item 1A. “Risk Factors”. This Management Discussion and Analysis section contains analysis and discussion of financial results computed in accordance with U.S. generally accepted accounting principles (“GAAP”) and non-GAAP measurements. To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we provide non-GAAP financial measures to enhance investor understanding of our period-over-period operating performance and business trends, as well as for assessing our performance versus that of industry peers. Refer to the “Non-GAAP Financial Measures” section for additional information. Commencing with our financial results for the quarter ended June 30, 2021 and for subsequent reporting periods, we relabeled “Core Earnings (excluding PAA)” as “Earnings Available for Distribution” (“EAD”). Earnings Available for Distribution, which is a non-GAAP financial measure intended to supplement our financial results computed in accordance with GAAP, has replaced our prior presentation of Core Earnings (excluding PAA). In addition, Core Earnings (excluding PAA) results from prior reporting periods have been relabeled Earnings Available for Distribution. In line with evolving industry practices, we believe the term Earnings Available for Distribution more accurately reflects the principal purpose of the measure than the term Core Earnings (excluding PAA) and will serve as a useful indicator for investors in evaluating our performance and our ability to pay dividends. The definition of Earnings Available for Distribution is identical to the definition of Core Earning (excluding PAA) from prior reporting periods. As such, Earnings Available for Distribution is defined as the sum of (a) economic net interest income, (b) TBA dollar roll income and CMBX coupon income, (c) realized amortization of MSR, (d) other income (loss) (excluding depreciation expense related to commercial real estate and amortization of intangibles, non-EAD income allocated to equity method investments and other non-EAD components of other income (loss)), (e) general and administrative expenses (excluding transaction expenses and non-recurring items) and (f) income taxes (excluding the income tax effect of non-EAD income (loss) items) and excludes (g) the premium amortization adjustment (“PAA”) representing the cumulative impact on prior periods, but not the current period, of quarter-over-quarter changes in estimated long-term prepayment speeds related to our Agency mortgage-backed securities. Earnings Available for Distribution should not be considered a substitute for, or superior to, GAAP net income. Please refer to the “Non-GAAP Financial Measures” section for a detailed discussion of Earnings Available for Distribution. 54 ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES